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May focus: commercial real estate

E-commerce and its accompanying distribution centers, or fulfillment centers, are among the drivers behind the impressive growth in the Portland metro area's industrial real estate market.

"We've seen really strong growth in demand for industrial space over the last five years and, until recently, not enough supply has led to that demand," said Kevin Kriesien, vice president of industrial brokerage in Jones Lang LaSalle's (JLL) Portland office.

Rental rates for industrial space have increased more than 36 percent over the five-year period, with space now leasing for about 64 cents per square foot per month, he said, adding consumers' shift from shopping in traditional retail stores to a preference for e-commerce means companies that deliver products want their distribution centers to be closer to customers.

"They want to be able to better serve those last-mile customers, and we expect that trend to continue," Kriesien said.

While cannabis production has helped increase the demand for industrial space in other major cities where recreational marijuana has been legalized, it has not yet played a significant role in Portland's market. Kriesien attributes that to the favorable growing conditions in other parts of Oregon, diminishing the need to locate grow operations in the metro area.

"We may see the more obsolete, older-generation buildings that are no longer functional for traditional users made available for cannabis growers," he said.

Large industrial projects such as Vista Logistics Park in Gresham have helped ease some of the demand, though there remains a shortage of high-end industrial space in the metro area and rent prices are continuing to increase, said Tim Harrison, senior research analyst in JLL's Portland office.

"We're seeing that start to slow down, but we're also starting to see the lower-end stuff begin to lift rents to higher prices," he said.

Kriesien noted that one of the most interesting developments in the industrial sector has been the evolution of the buildings themselves. Industrial space is being designed to be much more efficient, with warehouses becoming more compact, narrower aisles, and robots and driverless forklifts handling packages for distribution.

He and Harrison pointed to South Seattle, where Prologis is building a 589,615-square-foot, multistory fulfillment center. Called Georgetown Crossroads, the three-story distribution center will have ramps for truck access to second-floor loading docks and a freight elevator will link the third floor to ground-floor loading docks.

Prologis stated that with vacancy rates in Seattle at historic lows and transportation costs on the rise, retailers and manufacturers are locating "e-fulfillment operations" in urban centers to reduce truck trips while also meeting consumers' expectation that their online purchases will be delivered quickly.

"While Portland still lags behind Seattle in terms of rents in the urban core, those types of products are no longer out of the question," Kriesien said.

"We will see a big increase in that type of building coming to other markets," Harrison added.

An analysis of Portland's industrial sector by Colliers International stated that the first quarter of 2018 showed negative market-wide net absorption for the first time in 10 quarters, mostly due to Safeway moving out of its 860,000-square-foot distribution center in Clackamas and the buyer, Maletis Beverage, marketing the building for lease before committing to using all or a portion of the space for its own operations. Jacob Pavlik, the Colliers report's author, said it's likely a third party will lease the space for cold storage or that Maletis will occupy most of the space before the end of the year.

The quarterly analysis highlighted the sector's largest positive net absorption at Airport Way, with 841,000 square feet absorbed and a vacancy rate of 4.25 percent. The biggest factor was the addition of a new warehouse and distribution center for the U.S. Postal Service, which is moving out of its longtime Pearl District location.

Westside markets such as Guilds Lake, Beaverton and Hillsboro have the lowest vacancies for industrial space at 3.01 percent, which is a slight increase since the last quarter of 2017. The East Columbia Corridor has the highest industrial vacancy rate at 10.08 percent.

Airport Way and the East Columbia Corridor boast the biggest share of projects recently completed and under construction, with 1.3 million square feet delivered and another 2.1 million square feet still in the pipeline. Rental rates for these properties are 59 cents per square foot per month compared to the national average of 60 cents per square foot per month, despite the inventory consisting of larger buildings and spaces.

Market-wide blended asking rents were down slightly – from 63 cents to 60 cents per square foot per month – between the fourth quarter of 2017 and the first quarter of this year. However, they are still up from 55 cents per square foot per month in the first quarter of 2017 and are likely to rise with increasing out-of-state demand for warehouse and distribution space, Pavlik stated in the Colliers International analysis.